New Zealand Prime Minister John Key announced today that he has ordered an inquiry by the Inspector-General of Intelligence and Security into the conduct of government spies leading up to the arrests of Kim Dotcom and his co-defendants. The GCSB is the Kiwi equivalent of the CIA and is forbidden by law to conduct surveillance on New Zealand citizens or permanent residents in the country. Nevertheless, the bureau helped the U.S. by spying on Kim Dotcom, Bram van der Kolk, and their families.

For some months now, Megaupload founder Kim Dotcom has been painting his fight with the U.S. authorities as quite literally a mega-battle, one that goes to the highest levels in the United States government thanks to the involvement of Hollywood’s elite.

Some of the claims about events stateside have been nothing short of sensational, but today confirmation of a new and quite extraordinary scandal threatens to further weaken the case against the Megaupload defendants.

This morning Prime Minister John Key announced he has requested an inquiry by the Inspector-General of Intelligence and Security after the Government Communications Security Bureau illegally intercepted the communications of individuals in the Megaupload case.

The Government Communications Security Bureau (GCSB) is an intelligence agency of the New Zealand government responsible for spying on external entities, much like the function of the CIA in the United States. It is forbidden by law from conducting surveillance on New Zealand citizens or permanent residents in the country.

The statement from the Prime Minister says the Crown has filed a memorandum in the High Court advising that the GCSB acted unlawfully while assisting the police to locate “certain individuals” in the Mega case.

Those individuals are believed to be Kim Dotcom, Bram van der Kolk, and their families. Prime Minister Key admits that the GCSB acquired communications without statutory authority.

Key says that he learned of the unlawful activity after speaking with the head of the GCSB last Monday and then took action to refer the issue to the Inspector-General, Hon Paul Neazor, who has the power to investigate matters related to the GCSB’s compliance with the law.

“I expect our intelligence agencies to operate always within the law. Their operations depend on public trust,” Key said.

“I look forward to the Inspector-General’s inquiry getting to the heart of what took place and what can be done about it. Because this is also a matter for the High Court in its consideration of the Megaupload litigation, I am unable to comment further,” Key added.

While the GCSB acting illegally is clearly an embarrassment for the government, Prime Minister Key now has some serious explaining to do. GCSB is a department that is responsible directly to him, a point not lost on Labour leader David Shearer.

“This is a shocking breach of New Zealand’s very strict laws restricting the ability of our spy agencies to snoop on people,” Shearer said in a statement this morning.

“John Key must also come clean about his claim that he hadn’t heard of Kim Dotcom until the Solicitor-General briefed him the day before the raid on the German businessman’s mansion. This is simply not credible given the range of people close to John Key who were involved in the Dotcom case.”

Shearer added that the Prime Minister would have been required to personally authorize monitoring carried out by the GCSB.

“He is responsible as Prime Minister for signing off all intercept warrants by GSCB. While it’s been revealed that ‘some’ bugging was done illegally, it is not credible to think that other monitoring by the agency was not signed by the Prime Minister before the raid was carried out,” Shearer said.

“This is not about national security. This is about John Key’s own word and whether he has told the truth to New Zealanders.”

Lawyer for Kim Dotcom Greg Towers said that since the matter was still before the court, he could make no further comment, but suggested that the revelations would have implications for Dotcom’s extradition hearing. Kim Dotcom added the following.

“I’m now a real life James Bond villain in a real life political copyright thriller scripted by Hollywood & the White House. I welcome the inquiry by [the Prime Minister] into unlawful acts by the GCSB. Please extend the inquiry to cover the entire Crown Law Mega case,” he said.

Dotcom’s lead lawyer in the U.S., Ira Rothken, said he is looking forward to learning of any US involvement in alleged domestic spying in New Zealand.